Posted on February 22, 2019
If you follow the price tracker at the top of our JM Bullion pages, you’ll notice that the price of gold, silver, platinum, and palladium are constantly updated throughout the day. Spend enough time reading about one of our products, and when the page refreshes you may find that a metal that was up a few dollars or cents a moment ago is now down. And if you’re a regular browser of the JM Bullion website, you’ve probably noticed the steady rise in the price of palladium. Often overlooked, palladium has been on a meteoric rise since late 2018 that has seen it eclipse gold as the most expensive metal per ounce.
In December 2018, palladium surged up to $1,274 per ounce, surpassing gold’s price per ounce at that time. While each of the four major metals ebb and flow week-to-week and year-over-year, palladium has continued its surge into 2019. As of Friday, February 22nd, the price of palladium is up to $1,490.75 per ounce compared to $1,332.96 per ounce for gold. Palladium’s rising price is outpacing gold at the moment and this is a trend that could continue throughout 2019. Johnson Matthey recently published a report on palladium’s 2018 performance and its outlook for 2019 that is worth a read. To save you the time, we break down those findings in this week’s blog post.
Just six months ago in mid-August, the price of palladium had retreated under $850 per ounce. The looming threat of a prolonged US-China trade war created concerns of a slowing global economic growth. Many investors moved away from long-term futures positions and the price of palladium cooled as a result.
On the whole, 2018 saw palladium’s supply from mining increase and supply from recycling increase, but demand outstripped those gains. The two primary miners of palladium, South Africa and Russia, sourced higher volumes of palladium in 2018. Recycling of palladium, mostly from catalytic converters, increased significantly in 2018 as well. However, the demand in the automotive industry (in particular) also jumped compared to 2017. Though demand from the jewelry sector was down, industrial application demand was up.
Palladium’s market deficit narrowed throughout the year as supplies were boosted and recycling increased in the face of moderate demand. The situation was further boosted by divestment in palladium ETFs which fell throughout 2018 from 2.8 million ounces in January to 20,000 ounces by August. So, what explains the surge that began in December 2018 and continues to this day?
The price of palladium is rising due to what factor analysts refer to as a “structural deficit.” While the amount of palladium sourced from natural deposits increased in 2018 along with increases in recycling, neither are sufficient to keep up with the growing demand for palladium from its primary sector: the automotive industry. The structural deficit that exists is expected to widen drastically throughout 2019.
The European and Chinese automotive markets face increasingly strict legislation regarding emissions that could stimulate a double-digit rise in the demand for palladium for the production of catalytic converters. While the rising price is forecast to generate some liquidity as palladium holders cash in on its record-high values, the market currently holds just 730,000 ounces. That is not estimated to be enough to cover the deficit between supply and demand as investors sell off their palladium holdings.
Further, recycling of existing catalytic converters as a palladium source is expected to rise, but that is the only source of recycling that is predicted to rise in 2019. Most importantly, there is little expectation that a growth in mining will boost supplies in 2019. Despite the contributions of recycling as a source of palladium, mining remains the primary source of palladium for the market. Mines in South Africa and Russia alone contributed relatively flat numbers from 2016 to 2018 (in millions):
Even though recycling has been on the incline in recent years, rising from 2.491 (million ounces) in 2016 to 3.212 in 2018, gross demand for palladium is far outpacing both. Here’s the increase in gross demand since 2016 (in millions):
Simply put, there isn’t enough palladium out there right now to meet the growing demand for the metal. While investor selloffs and recycling will add liquidity, flat production from palladium mines around the globe is creating a growing structural deficit that prevents overall supply keeping up with demand.
Palladium has already set new record highs in pricing in the first two months of 2019. If the report from Johnson Matthey is accurate, you can expect to see more records set this year as the gap between supply and demand widens.
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